Is student loan forgiveness the answer?

Posted by Student on 2009/03/13 @ 1125 Comments (2) (show tags and categories)

Many sectors of the economy, from banking to insurance to manufacturing, have all received extremely sizable public assistance in order to repair their damaged businesses. To be clear, these “bailouts” are actually offsetting the losses from disastrous decision-making or failed business models. If the economy were not being affected en masse, these same businesses would probably be allowed to fail, because every indication is that they have failed.

What, then, about those who used debt to create real value? What about the companies that leveraged their debt and invested wisely? What about the individuals who used debt to pay for education? This line of reasoning is loaded, because it takes as a presupposition that “Education is Valuable.” With the caveat that some people might argue over the true value of education, Student Loan Bubble will take it as a given that college usually does increase an individual’s capacity to be a productive member of society.

At what point did we collectively decide that our public funds would be used to reward failed businesses? When did we decide we would use public money to send people to school, only to leave them with crippling debt repayments? As Student Loan Bubble has previously speculated, it is entirely possible that the public financing of education has driven tuition prices up at a rate much faster than inflation.

As a nation, are we entirely satisfied to punish the most productive members of our society with debt that is impossible to discharge, when it was probably a public policy error that inflated tuition prices in the first place?

Certainly, this line of reasoning is not without consequence. This is the perfect storm that would trigger the Student Loan Bubble, which would create a new “dark ages” for US colleges and universities who rely on inflated tuition, and would bankrupt even more lending companies. Those securities that are backed by student loan debt would suddenly become “toxic assets” in exactly the same manner as housing mortgages. Government purchase of those newly-toxic assets would, in fact, be a bailout for the student lending industry.

At this point, Student Loan Bubble is not willing to articulate a formal position on the topic, but there are extremely compelling arguments to be made for both sides of the issue. Consider the following article from banks.com…

Excerpt from: http://www.banks.com/blogs/mortgages/2009/03/13/wo…

In a way, it makes sense. How many of us graduated from school with student loan debt? What would we be able to buy if we didn’t have it? How much more would we be able to borrow if we weren’t making student loan payments? The stated goals of our leaders, since the issue of financial crisis reared its head, have all been connected with getting us to spend more money. So why not make it possible?

Student loan forgiveness would be costly, though. The government would have to buy all the loans from the folks it subsidizes to offer low cost student loans, and then forgive the loans. It could work, though, as part of the effort to cut out the “middle man” when it comes to student loans. If the government began making the loans directly to students, rather than paying others to do so, the government could make money on it. And it might go toward reducing the horrendous deficit we’re in.

Regarding H.R.384: Consumer Protections for Student Borrowers

Posted by Student on 2009/02/19 @ 0630 Comments (0) (show tags and categories)

On January 26, 2009 a coalition including The Project on Student Debt sent the following letter to Congressman Barney Frank, Chairman of the Financial Services Committee, and Congressman George Miller, Chairman of the Education and Labor Committee. Student Loan Bubble is reprinting the full text of the letter, formatted as HTML for the Internet, without additional commentary.

Dear Chairman Frank and Chairman Miller:

As representatives of students, consumers, colleges, administrators, and counselors, we want to take this opportunity to thank you for your efforts to include consumer protections and accountability under the Troubled Asset Relief Program (TARP) through H.R.384, the TARP Reform and Accountability Act of 2009.

We are writing about an urgent matter related to the planned roll-out of the TARP sub-program, the Term Asset-Backed Securities Loan Facility (TALF), in February. As you know, we are concerned about the planned allocation of TALF funds to private student loan providers. Private student loans are more risky and expensive than federal loans because of high variable interest rates and few consumer protections, and private loan lenders already enjoy special bankruptcy treatment under federal law. For these reasons, financial aid experts agree that private loans should only be a last resort for students. Additionally, we estimate that just eight percent of undergraduates use private student loans, and many of those borrowers have not exhausted their federal loan options.

To ensure that taxpayer dollars in the TALF program serve students and consumers as well as lenders, we ask you to urge the Secretary of Treasury to make the receipt of TALF funds for private student loan financing conditional upon adequate consumer protections and better data collection. Specific conditions that we believe are important for the Secretary implement include:

  1. Loan modification and/or work-out requirements, such as reductions in principal and economic hardship deferrals, for current and future private student loans;
  2. Discharges in cases of borrower death or severe disability, for current and future private student loans;
  3. Limits on interest rates, origination and other fees for future loans;
  4. Mandatory loan certification and inclusion of the FTC holder notice for future loans; and
  5. Detailed data reporting on individual future loans replicating the reporting required for Family Federal Education Loans (FFEL) pursuant to section 1092b(a) of 20 U.S.C..

A bailout for the providers of usurious private student loans will not solve the college affordability crisis caused by the failing economy, and will actually be detrimental to many students and consumers. However, if a form of rescue is provided for private student loans, it would be unconscionable to do so without also providing better consumer protections. Implementing these protections will help ensure that private lenders do not unfairly benefit from the bailout at the expense of past, present, and future students and their families.

We realize that there are many pressing issues requiring your attention during these difficult economic times, but respectfully request that you consider this issue a priority given the fast-approaching commencement of TALF fund disbursement.

Sincerely,

American Association of Collegiate Registrars and Admissions Officers
American Association of Community Colleges
American Association of State Colleges and Universities
American Association of University Women (AAUW)
Americans for Fairness in Lending
Campus Progress
Consumers Union
Dēmos: A Network for Ideas & Action
The Greenlining Institute
National Association for the Advancement of Colored People (NAACP)
National Association of Student Financial Aid Administrators
National Center for Public Policy and Higher Education
National Consumer Law Center (on behalf of our low-income clients)
National Consumers League
The Project on Student Debt (an initiative of the Institute for College Access & Success)
National Association for College Admission Counseling
The Sargent Shriver National Center on Poverty Law
U.S. Public Interest Research Groups
United States Students Association

Long-term student loan inflation provided money to students, indirectly to colleges

Posted by Student on 2009/02/13 @ 0630 Comments (0) (show tags and categories)

A central component of the Student Loan Bubble thesis is the effect of over-abundant federally subsidized debt, which increased students’ access to cheap debt, and indirectly enabled colleges to charge more for tuition as a means of tapping into this debt. Richard Vedder and Andrew Gillen have written an interesting piece for Inside Higher Ed, in which they claim a 61 percent increase in the availability of this type of debt over the last decade, and dig into the ways colleges have spent that money.

Vedder and Gillen draw a parallel to the housing bubble by observing the similar financing practices that drove both bubbles. From the Student Loan Bubble perspective, the inverse observation is that the prospects for future growth in career income justified the risk of taking on student loans. This wager on future earnings downplayed the threat that young professionals might not be able to repay their debts, unless they truly earned more money through their career.

Both descriptions converge on the similarities to the housing bubble, but the conclusion is ultimately unsettling. Whereas over-extended home debtors are able to default on their mortgages, students have no home-like asset that can be repossessed by the bank. Vedder and Gillen suggest a somewhat bizarre strategy, whereby colleges purchase equity in students’ future earnings, financed by the college endowment. The suggestion is either deeply unsettling, or simply another way of saying that students will go into debt for the eduction, making repayments to the school instead of a bank. In all, it makes for an interesting read.

Excerpt from: http://www.insidehighered.com/views/2008/05/02/ved…

The 61 percent increase in inflation-adjusted federal loans over the last decade leaves virtually all their students capable of paying more in tuition. The schools can either raise tuition, using the additional money to help build a better (more prestigious) college , or could leave tuition unchanged in an inflation-adjusted sense. The decision they made is obvious from U.S. Department of Education data. Over the last 10 years, after adjusting for inflation, tuition is up 48% at public schools and 24% at private schools.

Giving schools more money to build better institutions may not seem like a bad idea, but keep in mind that their goal is to increase prestige. This means that they will not necessarily use the money to improve the education their students receive. For example, Inside Higher Ed recently reported that less than half of employees at America’s institutions of higher education are faculty, information reinforced by a new study released this week. Today’s universities are congested with vast bureaucracies that stifle innovation and waste resources. Princeton University recently constructed a fancy dorm that cost $70,000 more per bed than the median home price. This unnecessary largess should show that what increases prestige may have very little effect on the education of students. Moreover, much of the extra money for schools ultimately comes from the students, who have seen the average debt upon graduation steadily increase to over $20,000 last year.

The analogy to the housing bubble is nearly perfect. Low interest rates arising from expansionary Federal Reserve policies led to rising housing demand, rising home prices, and excessive lending to individuals with dubious credit worthiness. Similar things have happened with student loans. The federal government has provided subsidized, low interest credit, often to students whose prospects for graduating from college are marginal and whose credit histories are non-existent. Student loan defaults are rising along with tuition fees. Already, some private lenders are exiting the market and federal officials are starting to become increasingly worried about the availability of student loans. The government-induced housing bubble is paralleled by what could be thought of as a tuition-loan bubble.